Here’s Why I Think Adobe (NASDAQ:ADBE) Is An Interesting Stock

Simply Wall St
April 24, 2019

Like a puppy chasing its tail, some new investors often chase ‘the next big thing’, even if that means buying ‘story stocks’ without revenue, let alone profit.
But as Peter Lynch said in One Up On Wall Street, ‘Long shots almost never pay off.’

In the age of tech-stock blue-sky investing, my choice may seem old fashioned; I still prefer profitable companies like Adobe (NASDAQ:ADBE).
While that doesn’t make the shares worth buying at any price, you can’t deny that successful capitalism requires profit, eventually.
Loss-making companies are always racing against time to reach financial sustainability, but time is often a friend of the profitable company, especially if it is growing.

How Quickly Is Adobe Increasing Earnings Per Share?

The market is a voting machine in the short term, but a weighing machine in the long term, so share price follows earnings per share (EPS) eventually.
Therefore, there are plenty of investors who like to buy shares in companies that are growing EPS.
Who among us would not applaud Adobe’s stratospheric annual EPS growth of 51%, compound, over the last three years?
Growth that fast may well be fleeting, but like a lotus blooming from a murky pond, it sparks joy for the wary stock pickers.

Careful consideration of revenue growth and earnings before interest and taxation (EBIT) margins can help inform a view on the sustainability of the recent profit growth.
While we note Adobe’s EBIT margins were flat over the last year, revenue grew by a solid 24% to US$9.6b.
That’s a real positive.

You can take a look at the company’s revenue and earnings growth trend, in the chart below.
Click on the chart to see the exact numbers.

Are Adobe Insiders Aligned With All Shareholders?

Since Adobe has a market capitalization of US$136b, we wouldn’t expect insiders to hold a large percentage of shares.
But we do take comfort from the fact that they are investors in the company.
Notably, they have an enormous stake in the company, worth US$430m.
I would find that kind of skin in the game quite encouraging, if I owned shares, since it would ensure that the leaders of the company would also experience my success, or failure, with the stock.

Is Adobe Worth Keeping An Eye On?

Adobe’s earnings per share have taken off like a rocket aimed right at the moon.
That sort of growth is nothing short of eye-catching, and the large investment held by insiders certainly brightens my view of the company.
At times fast EPS growth is a sign the business has reached an inflection point; and I do like those.
So yes, on this short analysis I do think it’s worth considering Adobe for a spot on your watchlist.
Of course, identifying quality businesses is only half the battle; investors need to know whether the stock is undervalued. So you might want to consider this freediscounted cashflow valuation of Adobe.

Of course, you can do well (sometimes) buying stocks that are not growing earnings and do not have insiders buying shares. But as a growth investor I always like to check out companies that do have those features. You can access a free list of them here.

Please note the insider transactions discussed in this article refer to reportable transactions in the relevant jurisdiction

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.

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